Time for Major Rethink on When to Claim Social Security

By Carla Fried

Updated on: July 6, 2010 / 9:40 AM
/ MoneyWatch

If you happen to count yourself among the majority of Baby Boomers who fear outliving their money in retirement more than they fear death, it's time to break with American tradition. I am talking about the fact that more than two-thirds of Americans claim their Social Security retirement benefit before they reach their full retirement age, effectively denying themselves payouts that could be more than 75 percent higher if they just waited a bit longer to starting collecting. If you're looking to boost your retirement income, it's time for a major rethink on when to claim Social Security.

Social Security's Early-Bird Benefit Can Cost Plenty
When you opt for early Social Security benefits you accept a payout that can be just 70 percent of what you'd be entitled to if you held out until what Social Security deems to be your full retirement age. (Anyone born in 1960 or later has a FRA of 67). Even if Social Security is only going to be a small piece of your retirement income pie, a haircut of as much as 30 percent isn't exactly inconsequential.

And you could be turning down even more. The payout if you claim Social Security at the earliest possible age (62) is about 75 percent less than what you would be entitled to if you wait to start taking Social Security at age 70. You can use this retirement calculator to see how your start date impacts your benefit amount.

Stop Paying Attention to the Break-Even Date
Now of course, if you wait until age 70 to start receiving your Social Security check you're missing out on as much as eight years of payouts that can start at age 62. This is the classic "I wanna get what's mine, NOW" refrain. An even more common lament is that by delaying to age 70 you raise the odds that you will never collect as much in total than if you start early. This is the breakeven argument against delaying your start date: Since you can't count on living long enough to collect enough payments after age 70 to make up for all the benefits you didn't claim earlier, you're likely to leave money on the table. Indeed, depending on how long you delay starting your payouts your breakeven for when delayed benefits will surpass the cumulative value of earlier payouts is typically between age 76 and 81.

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I think the break-even date is irrelevant if your main concern is outliving your assets in retirement. Seems to me what really matters is taking advantage of any strategy out there that will give you more income if you in fact live a long time. I'm guessing all the Boomers who fear outliving their assets are well aware that there's at least a 50 percent chance a 65-year-old today will still be alive in 20 years. Turning down an early Social Security benefit buys a lot of extra retirement income for those later years.

Sure, in some instances drawing an early benefit is necessary; if illness prevents you from continuing to work past 62 and you have no other alternative sources of income, you're obviously going to want to tap earlier than later. And married couples have a few interesting Social Security options to consider that can combine early and delayed benefits. And yes, I am well aware of other strategies for drawing early and investing that money, as well as the intriguing Social Security double-dip. Those are indeed very viable strategies if you have the discipline (and liquidity) to make 'em work. For everyone else, planning to wait to take Social Security benefits is a smart way to lock in extra retirement income. Consider it your self-financed insurance policy to combat the fear of outliving your money in retirement.